Competition, cooperation and regulatory intervention impacts on independent school fees Article (Accepted Version) Elliott, Caroline, Konara, Palitha and Wei, Yingqi (2016) Competition, cooperation and regulatory intervention impacts on independent school fees. International Journal of the Economics of Business, 23 (2). pp. 243-262. ISSN 1357-1516 This version is available from Sussex Research Online: http://sro.sussex.ac.uk/id/eprint/81987/ This document is made available in accordance with publisher policies and may differ from the published version or from the version of record. If you wish to cite this item you are advised to consult the publisher’s version. Please see the URL above for details on accessing the published version. Copyright and reuse: Sussex Research Online is a digital repository of the research output of the University. Copyright and all moral rights to the version of the paper presented here belong to the individual author(s) and/or other copyright owners. To the extent reasonable and practicable, the material made available in SRO has been checked for eligibility before being made available. Copies of full text items generally can be reproduced, displayed or performed and given to third parties in any format or medium for personal research or study, educational, or not-for-profit purposes without prior permission or charge, provided that the authors, title and full bibliographic details are credited, a hyperlink and/or URL is given for the original metadata page and the content is not changed in any way. http://sro.sussex.ac.uk Competition, Cooperation and Regulatory Intervention Impacts on Independent School Fees Abstract This paper examines the factors determining fee levels set by independent schools, focusing on the impact of competition, cooperation and regulatory intervention in the sector. Results indicate that, once account is taken of factors such as the extent of local competition between independent schools, the impact of the 2003-2005 Office of Fair Trading investigation into the fee-setting cartel on independent school fees becomes insignificant. Meanwhile, the extent of competition between independent schools has a significant effect on levels of boarding school fees. Results highlight the importance of considering pricing strategies of groups within a cartel. Keywords: School Fees; Cartel; Competition Policy; Spatial Competition JEL Classifications: D22; D43; I20; K21; L41 1 Competition, Cooperation and Regulatory Intervention Impacts on Independent School Fees 1. Introduction This paper examines the factors determining the fee levels set by independent secondary schools, focusing on the impacts of competition, cooperation and regulatory intervention in the sector. This is an important but much neglected topic in the literature. The independent school sector is an important part of the British education system with high quality graduates (Green et al. 2011) and parental decisions to send children to independent schools remaining popular (Independent Schools Council, 2015). Given this, it is surprising how little we know about the factors determining independent school fees. Below we shall first review the UK Independent School market to set out the context of the study. We then discuss the economic environment for independent schools with an emphasis on a recent investigation into the sector by The Office of Fair Trading (OFT). 1.1 The UK Independent School Market The independent school sector in the UK stretches back as far as 1382 when William of Wykeham established Winchester College as a feeder school for New College, Oxford which he had set up in 1379. Students were first admitted to Winchester College in 1394. The establishment of further independent schools was initially relatively slow: Eton College was established in 1440, and in the 1550s St. Paul’s Cathedral School, Merchant Taylors’ School, Westminster School and Shrewsbury School were all formed (Turner, 2015). The fortunes of the independent school sector have been mixed in the ensuing centuries (Turner, 2015). However, at least until recently, the independent school sector strengthened its position in the market to educate children. The Independent Schools Council (ISC, 2015) indicates that in 2015 there were 1,267 independent schools across the UK, covering both primary (typically up to the age of eleven) and secondary education (typically up to the age of eighteen). These schools currently educate over half a million pupils per year, with the numbers of children being educated in the independent sector growing steadily from just over 300,000 in the past forty years, while the average size of an independent school has gradually increased in the past thirty years from over 300 to above 400 pupils. Approximately 74% of pupils currently attend co-educational independent schools, with approximately 86% of these pupils being day pupils as opposed to boarders. Currently, 8.5% of pupils are not British, with schools starting 2 to set up overseas campuses, there now being 44 such campuses, educating almost 25,000 pupils (ISC, 2015). There have also been gradual but ultimately dramatic increases in UK independent school fees since the 1980s (Ryan and Sibieta, 2010), such that the rise of independent school fees in the 2000s was in excess of increases in either average family or the highest family income (Good Schools Guide 2013). See Figure 1 below for average fee levels in the most recent years 2002-2012. Generally, average real fees have been increasing over the ten-year period, although fees dipped in 2007, this being explored in the paper below.i Further, average day fees at schools that offer both day and boarding provisions are higher than at day schools, a feature highlighted by Starkie and Wise (2006) and borne out in the regression results below, while the average boarding fees at day and boarding schools are lower than the average fees at boarding only schools. Figure 1 about here 1.2 The Independent School Cartel Case Like firms in any industry, independent schools compete and cooperate with each other and the nature of competition and cooperation could have an impact on price (i.e. independent school fees). Back in 2003, fifty leading independent schools in the UK, including very high profile schools were exposed as potentially operating a fee-fixing cartel. The case was passed to The Office of Fair Trading (OFT), who concluded in 2005 that a fee setting cartel had existed in the 2001/2002 to 2003/2004 academic years. Further, the ‘Sevenoaks’ cartel had operated for longer, but the relevant UK 1998 Competition Act only came into force in 2000 and there was then an additional year during which firms were given the opportunity to change their behaviour prior to consideration of cartel behaviour by the competition authorities. See Appendix 1 for a list of the schools found guilty of taking part in the cartel. A number of reasons can be offered to explain the stability of the cartel. One of the key factors often claimed to contribute to the stability of any cartel is a small number of firms, with similar cost conditions that the firms are knowledgeable about. Hence, it is notable that the fifty school UK independent school cartel survived for years, without schools leaving the cartel. This is particularly interesting, since following the introduction of the 1998 Competition Act, the first school whistle-blowing on other cartel members could expect full exemption from any penalties offered under the Act, and fines up to 10% of UK turnover for 3 a maximum of three years may be imposed.ii Of course, the continued successful operation of the cartel may reflect the schools’ naivety that they were not breaking the law, either because they were not aware of changes to UK competition law in the late 1990s or from a misguided belief that the law did not apply to independent schools, typically with charity status assigned to them. Alternatively, Levenstein and Suslow (2006) highlight some long-lasting cartels involving large numbers of firms in a variety of industries, indicating that the success of cartels involving many firms may rest on the presence of industry associations or governmental support. This may at least partly explain the stability of the UK independent schools cartel as bursars are usually members of the Independent Schools’ Bursars Association, and admitted that they met regularly and discussed fee levels, although it has been claimed that this was done rather in an attempt to restrict fee increases in the face of cost increases (Guardian 2005). This paper aims to contribute to the limited economic literature on independent schools by providing an in-depth analysis of the nature of competition and cooperation between independent secondary schools, and the impact of regulatory intervention on levels of school fees covering both tuition and board. Specifically, an important question relates to the impact of the intervention by The OFT on independent school fees. The OFT produced a 2012 review of its investigation into the fee-fixing cartel that it instigated from 2003, concluding in 2005. According to The (2012) OFT report, as a result of The OFT investigation, fees at the schools that had been part of the fee-setting cartel had fallen significantly. However, the current research calls this result into question by extending The OFT (2012) research in a number of key ways. Crucially, the analysis below considers additional explanatory variables that may impact on fees including a range of measures of competition and cooperation that have typically not been adopted in the literature to date and also not adopted in the OFT (2012). First, the extent of local competition between independent schools is indicated by counting the number of independent schools within various distances around any individual school.iii Second, dummy variables are created, indicating formal and informal links between schools through common ownership and various affiliations. Finally, rather than relying solely on fixed effects panel data methods, a multi-level modelling approach is also adopted, again to capture the potential local nature of competition between independent schools.